Rated Wrong

It was obvious in 1999 when the first consultative paper on Basel 2 came out that using ratings as the basic risk assessment tool for regulatory purposes was a mistake. Belatedly it seems that the supervisors have realised their error. From the FT:

US regulators on Wednesday raised concerns about their own reliance on the credit ratings that are hardwired into the global financial system as they revealed new proposals aimed at addressing conflicts of interest in the industry.

Christopher Cox, chairman of the Securities and Exchange Commission, said the agency would soon consider whether to reform many of its rules “that make explicit reference to credit ratings”.

The problem is if they don't trust firms own internal assessments what will they use instead? Credit spreads? That would be even more procyclical. I wonder if it is time for a bring back 8% of notional campaign.